# Money markets and fixed income investment

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Question" MONEY MARKET AND FIXED INCOME"

Part 2BYield

The yield curve is the change in the interest rate of specific bond or security that is changed from time to time in the future, the future probability of the interest rate is dependent on the yield curve that will be available in the future so as to predict the yield curve of a specific bond or security, the yield curve of the specific security should be available so as to predict the future rate of a specific bond or security.

The yield curve changes from time to time as the future is not predictable also the inflation rates of different countries may change differently so this will automatically effect the yield curves of the different co’s , the yield curve is very much important in measuring the rate of interest , the rate of interest will change significantly if there is a change in the yield curve in which country or the stock market in which the co is operating.

Then ability of the yield curve from June to December is calculated in the table that is given in the sample file, the sample file indicates that the June yield curve is started at 2.5% at the start of the period and is ended at the end of the period means December. This is the yield prediction from the period June to December so this is based on the estimated that are made at the start.. The spot yield curve is 2.4% at the start of the period which become 2.6% at the end of the period, this may be due to the fact that the changes that are consistently being made in the spot or the rates of different stock market bonds or shares of the different co's so there are changes in the spot yield curve of different co's.

Forward curve...

A bond is a security that is purchased by different buyers so as to sell the bond at a rate that is more than the market price of a given bond at the time when the bond is going to sell in the future so as the worth of the bond is more then when it is purchased in the past, if the bond is sold at a price more then the price that what it is bought in the past, then the value of the bond is realized in the future if the value of the bond is more than the price that it is purchased in the past , the future value of the bond is dependent on the fact what the market in which the bond is going to sell, if the market in which the bond that is going to sell is lower than what the bond is purchased then the worth of that bond will be much lower then what it is purchased in the market at which the bond is being realized. The bonds and the other securities also lies to the fact that majority of them will be sold at profit in the future if the buyer has serious concerns to sell the bond in the future so to realize the benefit from the bond. The bond is also used to to create any loan towards a co or person as this will repayable in the future , as it is a type of short term loan , this also creates a liability, there is a major difference in the stock and bond, the stock is a equity instrument whereas the bond creates a liability in the future if the investment is made in the bond, the bond is a short term liability ,The bonds also give the buyer the right to pay sell the bond at any time in the future if the buyer is not going to keep the bond in the future , the price at which the bond will be sold in the future is much less or the face value of the bond if the bond is going to be sold at any time before its maturity, so it is very good to mature a bond so that its worth may be increased in the future so as the future worth of the buyer may also be increased in the future, the bond has also the very first right if the co is going to liquidate in the future, if in the future the co is going to be sold or being taken over by the government or any other co then the bond holder had the first choice to be paid in the future when the co is going to be sold There are also government bonds that are issued in auctions the return on the bond is dependent on the future price of the bond and its time to maturity in the future, if the bond is long term , the price of the bond and the return on the bond is much more than if the bond had time of short term. This fact also implies on the stock , if the time to maturity of the stock is longer then the return or the interest on the stock is much more then if the stock is short term, the stock price of a stock is also very much dependent on the stock market in which the co is operating , the stock market is also very much important in setting the price of a stock, the price of a stock is very much dependent on the change in the stock market change in which the co is operating, these factors should also be kept in mind. .The forward yield that is calculated in the table of the sample file is starting from 2.6% at the start of the period and is going to over 3.2% at the end period, this is also due to the fact that changes in the stock exchange rates of the different co's that are operating in the sector.

Prediction of spot rate from June 2013 to December 2013(6 months)

The June 2013 forward curve can predict the spot rate for the 6 months to the spot rate of the period of 6 months from June 2013 to December 2013 so as to arrive at the spot rate of the 6 months.

There are 3 types of yield curves , the first one is the normal yield curve which has an upward slope means the short term yield is lower than the long term curve, the second type of yield curve is the inverted yield curve which had a downward slope means the short term yield is more than the long term yield . The third type of yield curve is the flat yield curve as it had no effect on the slope as there is no yield between the short term and the long term yield. The Yield curve of the Australian Common wealth Government Securities is a normal yield curve that has an upward slop which means that the short term yields are lower than the long term yields so the slope is moving upwards, the yield curve has started from 2.5% to 4.5% at the end of the period which clearly suggests that there is upward sloping of the yield curves graph so the yield is normal yield curve of the Australian securities. The Level of different curves of the Australian securities is measured by the level at which the yield curve is at the start of the period and what the yield curve is at the end of the period , at the start the yield curve moving upwards as suggested that it is a normal yield curve , but as the time progressed the yield curve moved downward and also upward so there fluctuations in the yield curve as from the start towards the end of the period so this fact suggests that the yield curve is moved from normal yield curve to flat yield curve as the time passed , so this is what we mean by the level of the different yield curves of the Australian Implications for fixed interest fund managers is that they want to earn a fixed return over the investment they had made in the form of securities or any other type of investments they had made like the investments in shares of different co in the stock exchange market. Their implication lies to the fact of the investment they had made in the Australian securities. Interest rates in Australia for 6 months & 12 months.

The interest for the 6 months are predicted at 2.5% to 2.6% for the 6 months period, this is predicted on the calculations that are given in the sample file, this rate may also change from the effect of inflation and also the other factors that are not in the control of the Australian economy, also not in the control of the Australian government but this situation is less likely to be happen in the future.

(B)

(a) Portfolio composition in Market Value Terms & Face value terms Fundamental. Portfolio composition in the market value and the Face value term is the composition of investments in different types of commodities as well as investment in different class of assets, this composition lies to the fact of different types of compositions that the co had made in different types of investment components.

(b) At the commencement of tradingAt the commencement of trading the portfolio composition is based on the fact of the available funds that the co can invest in a specific type of investment or specific commodity or asset , this also lies to the fact of the different types of shareholders that co has to invest in specific types of investments , at the start there are not many shareholders that can invest on the behalf of the co because co is relatively new so the new shareholders will invest only for the co if the co has success in the future and the co's directors can assure the success of the co in the future.

(c) After Dealing Session 2After dealing session 2 the commodities yield curves are going downward as there is consistency in the yield rates of the different bonds or securities, this also lies to the fact that the future inflation rates are more than the inflation rates that are already had in the economy , there are also many other factors that also reduces the yield curves of the securities or bonds in the coming future ,so the changes in the yield curves of different securities is changing due to the fact that are discussed.

2. Level of interest risk

(a) Portfolio Modified Duration at the commencement of trading

The level of interest risk at the commencement of trading is lower because of the fact the co's investment is not much more at the start because the shareholders are not very much interested in the investment of a new co who has not a good mission statement at the start in making the co successful in the future so the level of risk will be much lower at the start. The shareholders will not invest in a co in which they has concerns over the success of the co , if the shareholders had concerns over the future success of the co then they will be very much reluctant to invest in that co , if they made investment in that co there may failures in the co so as the future of the co is very much not saved as the co is not going to give a going to give a good return to their shareholders, if the returns are not good to the shareholders they will invest in another co that will pay them a good return towards the level of investment they had made, the future success of the co is very important towards the investment of the shareholders, if the going concern status of the co is not then the co will not be able to complete its operations in the future , the future success of the co is very much important towards the success of the co, if the co is not be able to complete its operations in the future then the co will not be able to attract new investment in the future ,the future investment is very much dependent on the future success of the co, if the co is successful then the co will be able to gather more investments from different shareholders,

(b) Portfolio Modified Duration after Dealing Session 2

The level of risk after dealing session 2 will be much more then at the start of the trading. This is due to the fact that the investments that the co had made in the different bonds or securities will be increased as to the level of investments that are made at the start of trade so the risk factor is automatically increased because of the new investments.

3. Interestrate risk profile

The interest rate risk profile is changed because of the fact that interest rate changes as the time passes because of the effect of inflation and many other factors that the co had in making the interest yield curve. In the current yield curve environment the implications on our portfolio are very much. The interest rate risks are very much different after the start of the co because the co face many types of risks like the compliance risk or the employment risks, the risks that are faced by the co’s are very much after they had started their business, if the risks that the co face are more then the running of the business then the co will not be able to complete its operations in the future, if the co is not able to complete its operations in the future then there will be very much less investments left in the future for the co to be operate in the changing dynamic environment.